A new generation of Americans may eschew homeownership altogether after witnessing fallout from the housing bubble, said James Bullard, president and CEO of the Federal Reserve Bank of St. Louis.

Bullard made that assertion while commenting on a paper titled, "Housing, Monetary Policy, and the Recovery" during the U.S. Monetary Policy Forum under way Friday in New York City. The paper was written by Mike Feroli (JPMorgan Chase), Ethan Harris (Bank of America), Amir Sufi (University of Chicago Booth School of Business), and Ken West (University of Wisconsin).

Bullard, commenting on the paper's findings, said a major shift is under way, reshaping the old story of homeownership as the ultimate American dream.

"The current cohorts of new homebuyers likely see homeownership as a fundamentally riskier proposition than earlier cohorts, and therefore may be more likely to rent than own," he said. "Such a theory may suggest a more permanent shift to renting."

Bullard also warned that Americans with outstanding mortgage debt are weighed down by excessive debt levels.

Of the 75.3 million American homeowners, 49.4 million had debt outstanding in the most recent third quarter.

Altogether, these homes had $712 billion of equity to support close to $10 trillion in mortgage debt.

Meanwhile, the loan-to-value ratio average, which hung around 58% in 1970 and 2005, shot up to 90% during the crisis and remains there, Bullard said.

He says this dichotomy suggests homeowners who bought in the bubble borrowed in a manner where they never expected the possibility of price declines.

John Williams, president and CEO of the San Francisco Federal Reserve Bank, commented on the same report, saying that while the housing bubble was a major player in the crisis, it's not the only major headwind pressuring the economy.

In fact, Williams said the bubble started to pop after home prices peaked in 2006. By the time, Lehman Brothers collapsed in September 2008, home prices were already down by 20%, but were not the huge drag they eventually became on the economy.

He says prior to September 2008, "Housing starts had already fallen sharply, but effects on nonhousing indicators were relatively modest." Williams added, "The stock market, though off its highs, was still about where it had been when home prices peaked. And the economy was bearing the housing crash reasonably well. In many ways, it looked like a replay of the recession following the dot-com bust."

Williams says Lehman's crash was a game-changer, sending the markets and investors into a panic.

Federal debt levels

Besides individual debt, high levels of federal debt are also a concern. Other Federal Reserve players speaking at the conference warned that the central bank and Congress have a tough road ahead due to exceedingly high federal debt levels.

"In particular, the interest bill on the growing federal debt burden has been temporarily restrained by the low level of interest rates and high level of remittances from the Federal Reserve to the Treasury," said William Dudley, president and CEO of the Federal Reserve Bank of New York. "In addition, while significant fiscal adjustments must take place, it is important to recognize that such efforts will necessitate offsetting shifts in private domestic spending and production both here and abroad. Finding ways for these adjustments to occur smoothly is an important challenge for economic policy."

Meanwhile, Charles Plosser, president and CEO of the Federal Reserve Bank of Philadelphia, said the central bank needs to begin drawing a clear line of demarcation between the central bank and lawmakers who influence through political activity.

"Once a central bank ventures into fiscal policy, it is likely to find itself under increasing pressure from the private sector, financial markets or the government to use its balance sheet to substitute for other fiscal decisions," Plosser warned. "Such actions by a central bank can create their own form of moral hazard, as markets and governments come to see central banks as instruments of fiscal policy, thus undermining incentives for fiscal discipline. This pressure can threaten the central bank’s independence in conducting monetary policy and thereby undermine monetary policy’s effectiveness in achieving its mandate."

Plosser revived a point he introduced three years ago, saying he once argued for an accord between the Treasury Department and central bank that would cut back on the ability of the Fed to lend to private individuals and firms outside of its discount windows.

Related Articles

Kerri Ann Panchuk was the Online Editor of HousingWire.com, and regular contributor to HousingWire magazine. Kerri joined HousingWire as a Reporter in early 2011 and since earned a law degree from Southern Methodist University. She previously worked at the Dallas Business Journal.

This month inHousingWire magazine

[Subscribers only] Multigenerational living, where two or more adult generations live under the same roof, is becoming a growing trend in the U.S. Currently about 19% of Americans now live in a multigenerational household, the highest level since 1950. That amounts to about 60.6 million adults in 2014, up from 57 million adults in 2012. And homebuilders have taken notice, designing houses specifically catered to this segment.

Feature

Would-be homeowners are inundated with picture-perfect examples of new and remodeled homes brimming with upgrades. But in the real world, homebuilders and investors must calculate the rate of return on these sometimes fleeting trends, weighing what buyers want with what they can actually afford. This feature looks at which features buyers of different age demographics consider the most important, and what that means for sellers.

Commentary

We’ve found that the handling and posting of payments during bankruptcy has been a widespread issue in our testing environment. Specifically, there is increased risk exposure in pre-and post-petition payment application and treatment, both inside and outside of the bankruptcy plan. Servicers and sub-servicers have created manual workflow workarounds to address the issue, however, it does open the servicer up to more exposure to calculation errors.